Jefferies' Chris Wood: U.S. Market Losing Its Grip, Asia and Defence Stocks Gain Ground

If you ask Chris Wood, Jefferies's Global Head of Equity Strategy, significant changes may come to global financial markets. In his latest "Greed & Fear" newsletter, he suggests that the era of US market dominance is fading, and it's time to start looking more seriously at Asia and defence-related stocks.

Decline of US Market Supremacy

According to Wood, US stocks may have already peaked, just like Japan's market did in 1989. He points out that in late 2024, US stocks hit their highest-ever share of the MSCI All-Country World Index. But here's the red flag: US stocks are trading at high valuations, about 19.2 times their expected earnings. That's a sign that it's time to shift focus toward Europe, China, and India.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Another worry? The US dollar is showing weakness, and the bond market isn't helping either. Wood highlights a rare double sell-off: both the dollar and US Treasury bonds are being dumped by investors. That's something we haven't seen in over 30 years, and it could mean the US financial system is more vulnerable than it looks, especially now, when the privilege of printing the world's reserve currency is being quietly challenged.

Asia: The New Investment Frontier

Wood is bullish on Asia, particularly India and China. Why? He believes they've got the right economic structure for long-term growth. India is the strongest story not just in Asia but globally. Its economy is primarily driven by domestic demand and isn't overly tied to US or China trade. That protects it from global shocks, and if the dollar keeps sliding, India could offer double-digit returns.

China's making a comeback, too. Since hitting a low in September 2024, Chinese markets have bounced back strongly. The MSCI China Index is up 16.1% this year in dollar terms, way ahead of the global index's 2.1% gain. Wood argues that Chinese consumers don't need to become wildly optimistic, just a bit less cautious, which could make the market soar. With Chinese stocks currently undervalued, there's room to grow.

Surge in Defence Stocks

With global tensions on the rise, one sector is thriving: defence. Wood points out that companies like South Korea's Hanwha Aerospace and Japan's Mitsubishi Heavy Industries are making significant gains. Hanwha's stock has tripled, while Mitsubishi is up more than 180%. These companies are cashing in on countries trying to ramp up their military power, especially as US foreign policy grows more uncertain, possibly even more so under a second Trump administration.

India's defence sector is also heating up. State-owned firms like Hindustan Aeronautics and Bharat Electronics are beating local benchmarks, and Singapore's ST Engineering is right up there, too. What's the trend? Countries invest more in homegrown defence tech so they don't rely so much on outside help.

Portfolio Adjustments Reflecting New Realities

Wood isn't just talking; he's walking the walk. He's already made significant changes to his investment strategy. He's upped his stake in Indian real estate and digital companies like Reliance Industries and Zomato while trimming back his exposure to US stocks.

He's also shifted his Asia Pacific (ex-Japan) portfolio, bumping India to an "Overweight" position. Why? Because India's economy seems more stable than other countries dealing with trade conflicts and economic slowdowns. To make room, he's dialled down investments in Taiwan, opting for countries with stronger local demand and less dependence on global trade.

Conclusion

If Wood's predictions are correct, we could look at a significant turning point. With the US market showing signs of strain and Asia, especially the defence and tech sectors, looking increasingly promising, global investors might need to rethink where they're putting their money. It's not without risks, of course. But the opportunity? A chance to get ahead of the curve in a changing world.